The Colonial Alternative: The Pennsylvania System of Benjamin Franklin's Day

This is not the only way to run an economy. Until 1913, when the Federal Reserve Act was passed, the European system of debt peonage competed with what was called "the American system" – debt-free government-issued dollars generated by provincial governments to pay their expenses. This "greenback" system was not actually used in the United States after the American colonies became a nation, except during the Civil War; but the "American system" flourished for decades in colonial America. Paper money was issued by local provincial governments not only to pay their own expenses but as commercial loans. The most effective and efficient of these government-issued money systems was in Pennsylvania, where a publicly-owned bank issued paper notes and lent them to farmers. Since this money returned to the government, it did not inflate the money supply; and since the government issued and spent an additional sum of money on public works, enough money was kept in the system to pay the interest on the loans and prevent the debt spiral afflicting the private banking system. The Pennsylvania system worked so well that it completely funded the provincial government without taxes or inflation.

Benjamin Franklin and others maintained that the chief reason for the American Revolution was that Parliament forbade the colonies from issuing their own money. Paper money issued by the Revolutionary government got the colonists through the Revolutionary War, but the British heavily counterfeited this money as a deliberate war tactic, and by the end of the war it had been inflated so much that it was nearly worthless. Fear of inflation led the Continental Congress to completely omit paper money from the Constitution, which does not say who can issue paper money or under what circumstances. The private banks filled the breach, and by 1913 the United States had the same private central banking system that England had.

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Individuals, businesses/corporations, governments at all levels, MUST borrow from banks in order to get money created.Byron Dale

"Money is created when loans are issued and debts incurred; money is extinguished when loans are re-paid."John B Henderson

Money that one uses to pay interest on a loan has been created somewhere else in the economy by another loan.John M Yetter

"Our national circulating medium [i.e. dollars] is at the mercy of loan transactions of banks, which lend, not money, but promises to supply money they do not possess."Irving Fisher

The world has changed. The market fundamentalism that has dominated our economics over last three decades has been unmasked as a sham, deemed useless by the guardian of the integrity of finance itself, the Federal Reserve.

Without a vote of the Congress or a public debate, the Bush administration and the Federal Reserve have made government the guarantor of the shadow banking system – the unregulated, unhinged hedge funds and investment houses whose compulsive excesses now threaten the global economy. They say necessity is the mother of invention, but we seen only a part of the new machine, not surprisingly, the part that buttresses Wall Street. They have scrambled to put this together in an emergency, behind closed doors, without a hint of the necessary regulatory changes that must rationally accompany such guarantees. That is what the fight in the coming months will surely be about.

As the article below by David Wessel of the Wall Street Journal summarizes, the intervention puts at risk hundreds of billions of taxpayer dollars.

It also transforms the economic debate. It is inconceivable that taxpayers should be asked to bail out private buccaneer speculators without enforcing limits on their speculation – capital reserves, limits on what gambles they can take, oversight, transparency, new restrictions on their pay packages to remove the current multi-million dollar personal incentives to invent new Penza schemes and scams.

The shadow banking system now must be brought out of the shadows. After all we are constantly told that finance serves the economy, and the market system is the best means to solve our social goals. It feels very uncomfortable when our servant's servant becomes our master's master as Wall Street has been permitted to become in America in recent years by contribution- hungry elected officials.

As Barack Obama noted in his speech yesterday, the deregulation that fostered this folly was supported by both parties. It began under Jimmy Carter, accelerated under Ronald Reagan, went into hyper speed under Bill Clinton, and spiraled into catastrophe under George Bush. The freedom to gamble with other peoples’ money has been protected by lavish campaign contributions and powerful lobbies. These financial buccaneers have treated the laws and rules that govern our financial markets like just one more asset to be bought and sold. They have been unabashed in their arrogant abuse of power, rigging the rules and daring the world to stop them. A particularly audacious example occurred only last year when a concerted lobby campaign convinced the Democratic majority in the Senate to sustain the tax dodge that enables billionaire hedge fund operators to pay a lower tax rate than their secretaries.

This cannot continue. They ask to pocket their profits and have taxpayers protect them from their losses. That offends the principles of both democracy and the market. If they are too big to fail – if their failure will bring down the entire economy – then they are also too big to gamble on their own. They must be regulated – or perhaps nationalized, as the British have just done with one of their leading banks. After all they are asking to nationalize their losses. Why not some of their profits too?

This debate must be accessible to, and reflect the concerns of, citizens. It cannot be the exclusive province of so-called experts, Wall Street operators, economists and legislators. Too often, Wall Street manages to profit having the party and then make a bundle from the government in cleaning up the mess as they socialize the losses that they created.

It is important to understand how reckless Wall Street has been. They have not only victimized the American people through recession and bailouts. Their recklessness threatens to blow up their own cherished role as well. They have damaged the international reputation of the U.S. dollar, turning the world's reserve currency into the equivalent of a junk bond. The excesses of their hubris-driven repackaging of assets has muddied the U.S. credit allocation process and accelerated the US decline as the financial center of world commerce. Their sacred cow of "free trade" is unlikely to withstand the pressure of a prolonged slump. Wall Street is compulsively consuming itself.

We are going to follow this debate closely at CAF. It will be a constant feature of this blog. We’ll call on the best progressive economists and analysts to break it down. We’ll collect the best documents so you can follow the debate. And we’ll be driving campaigns to make certain that the public doesn’t once more get stuck with the bill for the bankers’ party, with no assurances that the reckless structure of finance has been repaired.

When the smartest guys in the room designed their credit default swaps, they forgot to ask one thing – what if the parties on the other side of the bet don't have the money to pay up? Credit default swaps (CDS) are insurance-like contracts that are sold as protection against default on loans, but CDS are not ordinary insurance. Insurance companies are regulated by the government, with reserve requirements, statutory limits, and examiners routinely showing up to check the books to make sure the money is there to cover potential claims. CDS are private bets, and the Federal Reserve from the time of Alan Greenspan has insisted that regulators keep hands off.

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"Derivatives" are complex bank creations that are very hard to understand, but the basic idea is that you can insure an investment you want to go up by betting it will go down. The simplest form of derivative is a short sale: you can place a bet that some asset you own will go down, so that you are covered whichever way the asset moves. Credit default swaps are the most widely traded form of credit derivative. They are bets between two parties on whether or not a company will default on its bonds. In a typical default swap, the "protection buyer" gets a large payoff if the company defaults within a certain period of time, while the "protection seller" collects periodic payments for assuming the risk of default. CDS thus resemble insurance policies, but there is no requirement to actually hold any asset or suffer any loss, so CDS are widely used just to speculate on market changes. In one blogger's example, a hedge fund wanting to increase its profits could sit back and collect $320,000 a year in premiums just for selling "protection" on a risky BBB junk bond. The premiums are "free" money – free until the bond actually goes into default, when the hedge fund could be on the hook for $100 million in claims. And there's the catch: what if the hedge fund doesn't have the $100 million? The fund's corporate shell or limited partnership is put into bankruptcy, but that hardly helps the "protection buyers" who thought they were covered.

After a brief stay with the Surveyor-General of Natal, Dr. P.C. Sutherland, in Pietermaritzburg, Rhodes took an interest in agriculture and joined his brother Herbert on his cotton farm in the Umkomaas valley in Natal. In the colony, he established the Rhodes Fruit Farms[4] in the Stellenbosch district. In October 1871, Rhodes left the colony for the diamond fields of Kimberley. Financed by N M Rothschild & Sons, Rhodes achieved a virtual monopoly in the diamond mining industry, Rothschild also profiting on the yield from the future exploitation.[citation needed] He supervised the working of his brother's claim and speculated on his behalf. Among his associates in the early days were John X. Merriman and Charles Rudd, who later became his partner in the De Beers Mining Company and Niger Oil Company. After he first came to Africa, Rhodes supported himself with money lent by his Aunt Sophia.[5]

Quote:

Rhodes wanted to expand the British Empire because he believed that the Anglo-Saxon race was destined to greatness. In his last will and testament, Rhodes said of the British, "I contend that we are the finest race in the world and that the more of the world we inhabit the better it is for the human race." He wanted to make the British Empire a superpower in which all of the white countries in the empire, including Canada, Australia, New Zealand, and Cape Colony, would be represented in the British Parliament. Rhodes included Americans in the Rhodes scholarships and said that he wanted to breed an American elite of philosopher-kings who would have the USA rejoin the British Empire. Rhodes also respected the Germans and admired the Kaiser, and allowed Germans to be included in the Rhodes scholarships. He believed that eventually Great Britain, the USA and Germany together would dominate the world and ensure peace together.[5]

On domestic politics within the United Kingdom, Rhodes was a supporter of the Liberal party.[5] Rhodes’ only major impact on domestic politics within the United Kingdom was his support of the Irish nationalist party, led by Charles Stewart Parnell (1846-1891).

* Thierry Breton - French Minister of Economy, Finance and Industry (2005-2007)
* Liam Byrne - Minister of State at the Home Office (2006-present); Minister of State at Her Majesty's Treasury (2008-present)
* Baron George - Governor of the Bank of England (1993-2003)
* Baron Lamont of Lerwick - Member of the British Parliament (1972-1997); Chancellor of the Exchequer (1990-93)
* Sir Edwin Leather - Member of the British Parliament (1950-1964); Governor of Bermuda (1973-1977)
* Oliver Letwin - Member of the British Parliament (1997-present); Chairman of the Conservative Research Department (2005-present)
* Baron Neuberger of Abbotsbury - Lord of Appeal in Ordinary (2007-present)
* Georges Pompidou - President of France (1969-1974)
* John Redwood - Member of the British Parliament (1987-present)
* Felix Rohatyn - United States Ambassador to France (1997-2000)
* Gerhard Schröder - Chancellor of Germany (1998-2005)
* Sir Clive Whitmore - Permanent Secretary of the Ministry of Defence (1983-1988)
* Baron Wakeham - Leader of the House of Lords (1992-1994); Leader of the House of Commons (1987-1989)

Trying to find a simple explanation of the debt money cycle is difficult, but I think I have it figured out.

If 100 monetary units of interest-bearing debt are loaned to a government, and 110 have to be paid back, immediately there is a problem, because there are only 100 units in circulation.

What's the solution? The government borrows more from the central bank to service the unpayable debt owed and institutes ever increasing draconian, deceptive measures to sustain itself. Citizens become tax slaves.

Trying to find a simple explanation of the debt money cycle is difficult, but I think I have it figured out.

If 100 monetary units of interest-bearing debt are loaned to a government, and 110 have to be paid back, immediately there is a problem, because there are only 100 units in circulation.

What's the solution? The government borrows more from the central bank to service the unpayable debt owed and institutes ever increasing draconian, deceptive measures to sustain itself. Citizens become tax slaves.

Yes, government borrows more money into circulation, but nevertheless debt is always greater than the money supply!

According to the Ithacahours website http://www.ithacahours.com their debt-free money is going global. Great slap at the central banksters. While they may not state it in wording they have apparently discovered the basic axiom for debt-free money:

“There is a basic axiom on money that is either unknown by monetarists or ignored in favor of the many schemes used to enrich the few at the expense of the many. It goes like this:

“As universal prosperity is dependent upon the ability of Money to flow (its “velocity”), nothing may be done to money that would in any way impede that flow.”

“This would exclude things like using commodities for money (gold, silver), adding bankers’ gimmicks like interest to money, or in giving money additional uses beyond its sole legitimate use as a “medium of exchange.”

“Money needs to be “created” into circulation by a system’s wealth producers, never “borrowed” or “spent” into circulation by its bankers or consumers. It needs nothing backing it but the integrity of its issuers (in a second-rate democracy there can be no integrity).

“That is the rule, though it cannot be applied in this time and place. Money issuance is government’s most sovereign prerogative, yet in honest form is as unobtainable as is the only workable FORM of self-government, a Republic.

“Had we a Republic, one of the very few prerogatives granted to the upper levels of government would be money issuance, a completely worthless medium of exchange, which being worthless would never be hoarded but would be quickly spent for something that one coveted for its intrinsic value. This velocity is what produces UNIVERSAL prosperity. Lack of velocity is what creates wealthy and impoverished classes of people, plus the struggling middle class that actually produces the wealth, and unfortunately, their ranks are constantly diminishing.”

While debt-free money cannot be instituted at this time by corrupt governments, obviously it can and is being utilized by some communities around the world. This is the biggest advance in monetary policy since the ’30s when thousands of communities and counties across America issued currency that circulated during the Roosevelt bank holiday. Damn shame they quit it when the banks reopened. They proved we don’t need the banksters leeching off our productivity. Another great advantage with Ithicahours or any local currency is that it is not acceptable outside the local economy and is therefore not siphoned off like a national or international currency would inevitably be. Central banks, including and since the first Bank of the US started by Hamilton do nothing for local economies but allow wealth concentration in the hands of the few while impoverishing the many.

This budding concept needs widespread distribution. It must be instituted when present governmental structures and the monetary systems they spawn collapse of their own internal rot and putrefaction.